Adams Company Predicted Factory Overhead for Year 2 and Year

question 102

Multiple Choice

Adams Company predicted factory overhead for Year 2 and Year 3 would be $120,000 for each year. The predicted activity for Year 2 and Year 3 would be 30,000 and 20,000 direct labour hours, respectively. Additional data are as follows:
$\begin{array}{lcc}&\underline{\text { Year } 1} & \underline{\text { Year } 2}\\\text { Sales in units } & 25,000 & 25,000 \\\text { Selling price per unit } & \$ 20 & \$ 20 \\\text { Direct materials and direct labour per unit } & \$ 10 & \$ 10\end{array}$ The company assumes that the long-run normal production level is 20,000 direct labour hours per year.The actual factory overhead cost for the end of Year 1 and Year 2 was $120,000.Assume that it takes one direct labour hour to make one finished unit.
-Refer to the figure.When the annual estimated factory overhead rate is used,what are the gross profits for Year 2 and Year 3,respectively?

• A)$120,000 and $100,000
• B)$120,000 and $150,000
• C)$150,000 and $100,000
• D)$250,000 and $250,000

---

Definitions:

Accounting Period

A specific duration of time used for financial reporting, usually a fiscal year or quarter.

Comprehensive Income

The overall adjustment in equity during a reporting period, apart from dealings with owners, incorporating every unrealized gain and loss.

Conceptual Framework

A system of ideas and objectives that guide the development, preparation, and interpretation of financial reporting and accounting standards.

Recognition and Measurement

The principles that determine the timing and amount at which elements of financial statements are recorded.